BNP Paribas AM: MAQS Asset Allocation Monthly

KEY THEMES & MACRO ENVIRONMENT

·        Less fragile goldilocks

o   goldilocks conditions are firming up amid recovering economic data, accommodative central banks and stabilising US-China trade

o   we see the coronavirus as transient for markets

·        Risks remain, but tails are less fat

o   we still see the two main risks as a slowdown or a reflationary environment

o   the probabilities are now lower

·        Short term risk/reward is unattractive

o   we don’t want to chase market

o   our market dynamic toolbox signals near term vulnerabilities

ASSET ALLOCATION: ASSET VIEWS

·        Equities: waiting to buy the dip

o   our base case remains supportive but short-term risk/reward is unattractive

o   the latest earnings reports will be key

·        Goldilocks trades: long emerging market USD debt and EMU REITs

o   we continue to like carry assets, supported by the prevailing goldilocks conditions

·        Rates: short core EUR and long US breakeven inflation

o   we still see fixed income markets as rich and reflation as the big risk

·        FX: long USD and long JPY

o   we see an asymmetry in the USD outlook stemming from our risk scenarios

o   the JPY looks cheap and is a risk-off hedge

·        Long gold

o   we see gold as supported in the current situation where central bank policy remains loose, but also see it performing in our main risk scenarios

·        De-globalisation trades

o   we are long CAC/DAX and long USD/CNY as we position ourselves for our strategically bearish view on de-globalisation

ASSET ALLOCATION: PORTFOLIO CORNER

·        Risk utilisation

o   having taken profits on our equity overweight, the active risk in our portfolios is currently modest, in line with our ‘buy the equity dip’ strategy

·        Factor exposures from core views

o   given the offsetting factor profiles of some trades and as we are neutral equities, our factor exposures are muted

·        Specific/tactical trades

o   we have implemented four trades outside of our MFA portfolio optimiser; these help diversify our portfolios

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